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Estate Planning - Starting to Plan
What are the options?

There are many ways to mitigate a potential inheritance tax problem and we aim to find the most suitable option for your needs. The simplest way to avoid Inheritance tax is to give your money away at least seven years before you die. This however, is easier said than done as most of us don't know and don't want to know when we are likely to die. For those in the difficult position of knowing that their life expectancy is limited; gifting is not very useful as it takes seven years before an absolute gift is considered completely outside your estate.

The good news is that after three years, you may start to receive some taper relief on the tax due on any gift above the nil rate bands. This reduces up until the seven years at which point full relief is granted.

To achieve this with an outright gift though, you do need to lose all control and access to the capital being gifted. For many people simply giving their savings away is not possible, because they remain dependent on their capital and the income that it generates. One of the first options to consider is to set up a whole of life assurance in trust to pay a lump sum equal to your potential inheritance tax liability. This is best done at an early stage in life as the premiums rise as people get older. The cost of life insurance for people in their 60's and 70's puts many people off this option, as the cost of insurance becomes more expensive as we grow older. However, if your inheritance tax liability is relatively low and you have a high disposable income it may be an option for you to consider.

Another option some consider is to build a portfolio of AIM listed stocks. These stocks are classed as business assets and are free from inheritance tax, if held for more than 2 years whist providing the investor with access to the capital. This is known as business property relief and of course is subject to change by future governments. However, this does require the investor to have an exceptionally high attitude to investment risk. AIM listed stocks may not be easily sold due to lack of demand and are also more likely to suffer from market volatility. We have found that this method of reducing inheritance tax is not a popular choice with investors due to the risks to capital and therefore do not usually recommend this service.

This leaves the option of setting up a trust. A trust is a way of ensuring that the right person receives the right money at the right time. A trust is funded by a "settlor", managed by "trustees" and is there for the benefit of the "beneficiaries".



There are a variety of ways to set up a trust and we don't propose to try to cover all eventualities here.

One thing you should be aware of when setting up a trust is tax.

  • Gifting too much money into trust can cause an immediate tax liability as gifts into trust are not immediately exempt from inheritance tax.
  • Gifting assets such as shares or a property would class as a disposal and may cause a Capital Gains Tax liability for the donor.
  • Gains and Income on some investments in a trust are subject to the highest tax rate charged by HMRC, currently at 45%.[2017/18 tax year]
  • On some trusts the trustees are responsible for the tax to be paid within the trust and for others it is the beneficiary.

You can see that reducing your inheritance tax requires careful consideration and guidance. The rules in relation to inheritance tax are also a political football frequently kicked around by all the parties. In the last few years we have seen the nil rate bands go from rising annually to allow for inflation to being frozen at £325,000 . We have also seen the introduction of the nil rate band allowance transfer between spouses alter the way wills are written and how we plan for reducing inheritance tax.

In April 2018 we saw the introduction of the main residence nil rate band. This additional allowance is planned to increase from £100,000.00 in 2018 to £175,000.00 improving our ability to mitigate inheritance tax.

When considering how to plan for the impact of inheritance tax on an estate, the investor may wish to involve some or all of the beneficiaries, especially where trusts are established. Also, Grandparents leaving money for their grandchildren may wish to involve their children as trustees, so as to ensure continuity should something happen to them.

It is important to remember that it is not always possible to completely remove the risk of inheritance tax and that any decisions made should not ultimately be to the detriment of the investor who, after all, may live for many years into the future and need financial support, especially when it concerns long term care. Paying for this and so reducing the value of your net worth, is one way that inheritance tax would most certainly be avoided.
The key element to any estate planning is to keep it simple and take advice from qualified professionals who understand the implications and will take time to understand your personal circumstances.

Like sweets there are many types, shapes and colours. However, we can sort them into three basic varieties.

  • Those that help limit the growth of your estate, Loan Trusts.
  • Gift trusts, that will start to reduce your estate after three years and will be outside altogether after seven years.
  • Lastly, discounted gift trusts that will provide some immediate reduction in the size of your estate.

The advantage of a Trust is that you can personalise the investments to match your attitude to risk (ATR) so they are suitable for people with a lower investment risk tolerance. You might feel that you can't do anything about IHT because you need your capital to provide for you. Trusts have a range of features that allow return of capital, either as one-off lump sum, regular lump sums or as a monthly income. It is very much a case of finding the right Trust for you. They have one additional feature that is often overlooked. Taking an income a return of capital can reduce your income tax from 20, 40 and 45% to zero during your lifetime by deferring tax until you have passed away. At that stage tax may be due based on the beneficiaries' tax status and how it is managed on exit from the trust investment.

Trusts typically start from around £50,000 and can be funded from cash or existing investments including ISAs, pension commencement lump sums and investment bonds.

Please note: Tax treatment depends on an investor's individual circumstances, and it may be subject to change.

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